I purchased a 3BR home in Washington DC in September of 2015 and have been using it as my primary residence along with my girlfriend, the girlfriend pays "rent" each month which i call "shared house expenses". I do not report this as income. I do however rent an in-law suite to a friend and i DO report that as rental income and 1/3rd the living space.

Starting this summer July 2018 I will be moving to New York for a long-term work assignment that will be about 2+ years. I will be renting a small apartment there and in the meantime a close friend will be "renting/house-sitting" my home in Washington DC and is going to pay me a below-market-rate monthly rent that will still allow me to break-even on a monthly basis. I am going to leave a lot of my belongings in the house and all of the utilities are going to stay under my name and I will also be traveling back to Washington DC quite often on weekends etc and staying at my house.

I am aware that this is a short-term solution and I am also aware of the risks involved from a personal relationship standpoint, but I am looking for advice on how to handle this from a tax/finances perspective as it is a situation i have never dealt with before!

The rules on renting your house are complex, but you should already know all of this from filling out Schedule E for your existing rental. The main advantage is being able to depreciate the house over time and that’s where the tax savings is. Your problem will be that in order to do that you cannot be there using it more than 14 days a year. What I would do is let your friend stay there, have them reimburse you for the utilities and taxes and visit as often as you like, just don’t collect any rent. Maybe he/she could take you out to dinner when you visit.

In a situation like this, the arrangement is not clearly a business rental.

You could define it as a business rental if you wish.

You could also define it as your friend doing some favors for you, and you doing some favors for your friend. If your friend is doing some house sitting and helping with some of the expenses out of gratitude for having a place to live, that might not necessarily constitute a business transaction that needs to be reported on your taxes.

I purchased a 3BR home in Washington DC in September of 2015 and have been using it as my primary residence along with my girlfriend, the girlfriend pays "rent" each month which i call "shared house expenses". I do not report this as income. I do however rent an in-law suite to a friend and i DO report that as rental income and 1/3rd the living space.
Starting this summer July 2018 I will be moving to New York for a long-term work assignment that will be about 2+ years. I will be renting a small apartment there and in the meantime a close friend will be "renting/house-sitting" my home in Washington DC and is going to pay me a below-market-rate monthly rent that will still allow me to break-even on a monthly basis. I am going to leave a lot of my belongings in the house and all of the utilities are going to stay under my name and I will also be traveling back to Washington DC quite often on weekends etc and staying at my house.
I am aware that this is a short-term solution and I am also aware of the risks involved from a personal relationship standpoint, but I am looking for advice on how to handle this from a tax/finances perspective as it is a situation i have never dealt with before!

I assume the "in-law" suite rental will continue?

No accountant here, but since you will be maintaining a presence in that house - seems to me that you may not actually be charging a clearly below market rate rent - since this renter will not have full access/control of the 2/3 of the house.

1 Have a rental agreement signed and then it is income.
2 Or, a friend is living with you and helping you out with expenses (not income) and sometimes you are there but sometimes not and nobody cares, you will have another residence and live between the two. Simple.
Either or, IMHO.
Keep it simple.
mahalo,
j

No accountant here, but since you will be maintaining a presence in that house - seems to me that you may not actually be charging a clearly below market rate rent - since this renter will not have full access/control of the 2/3 of the house.

Where is the girlfriend living during this time?
[/quote]

Yes the in-law suite will still be rental income.

And yes you are right in that its not "below market rate" because my friend will not have full control of the house since all my belongings will still be in there plus I will still stay there at least 14 days a year. The girlfriend is going to come with me to NYC.

Last edited by acedc33 on Tue Mar 13, 2018 2:45 pm, edited 1 time in total.

1 Have a rental agreement signed and then it is income.
2 Or, a friend is living with you and helping you out with expenses (not income) and sometimes you are there but sometimes not and nobody cares, you will have another residence and live between the two. Simple.
Either or, IMHO.
Keep it simple.
mahalo,
j

Yeah i definitely want to keep it simple and I think i have some flexibility in my unique situation. So if both scenarios work (1. collect and report income, and 2. consider the house still mine and friend is just paying expenses)... which is simpler and what are the pros and cons of both tax wise?

The rules on renting your house are complex, but you should already know all of this from filling out Schedule E for your existing rental. The main advantage is being able to depreciate the house over time and that’s where the tax savings is. Your problem will be that in order to do that you cannot be there using it more than 14 days a year. What I would do is let your friend stay there, have them reimburse you for the utilities and taxes and visit as often as you like, just don’t collect any rent. Maybe he/she could take you out to dinner when you visit.

My friend will be paying me $3k a month (if put on the open market i could probably get close to $5k/month for the 3BR Fully Furnished), Would that be a small enough amount to claim as "utilities and taxes" instead of "rent"?

I'm still trying to wrap my head around the depreciation of the whole house as a rental vs being able to write off your mortgage interest. I too am not an accountant, so i still don't really know what the pros/cons of either situation are and which one is simpler for my situation.

The scenario that the article is describing is kind-of what i was thinking about doing anyway: renting the house to a friend but still claiming it as my primary residence and thus NOT taking advantage of the tax benefits of rentals. So that is kind of my question... should I definitely be taking the steps to make it an official rental instead and making sure i don't stay there more than 14 days/yr? (while my friend is paying less than what i could get on the open market, it is still certainly within a normal feasible/reasonable amount).

The rules on renting your house are complex, but you should already know all of this from filling out Schedule E for your existing rental. The main advantage is being able to depreciate the house over time and that’s where the tax savings is. Your problem will be that in order to do that you cannot be there using it more than 14 days a year. What I would do is let your friend stay there, have them reimburse you for the utilities and taxes and visit as often as you like, just don’t collect any rent. Maybe he/she could take you out to dinner when you visit.

My friend will be paying me $3k a month (if put on the open market i could probably get close to $5k/month for the 3BR Fully Furnished), Would that be a small enough amount to claim as "utilities and taxes" instead of "rent"?
I'm still trying to wrap my head around the depreciation of the whole house as a rental vs being able to write off your mortgage interest. I too am not an accountant, so i still don't really know what the pros/cons of either situation are and which one is simpler for my situation.

Years ago, when I was single - a friend (also single at the time) - purchased a single family house. He "shared" the house (4 bedroom) with, normally, three others. Just about all of the costs of the house (including furniture) were treated as 1/4 personal and 3/4 "rental" - including depreciating 3/4 of it - for tax purposes.

Don't know for sure, but it seems that for 2+ years - you would benefit financially by treating it as mostly (since you will have a presence) rental.

1 Have a rental agreement signed and then it is income.
2 Or, a friend is living with you and helping you out with expenses (not income) and sometimes you are there but sometimes not and nobody cares, you will have another residence and live between the two. Simple.
Either or, IMHO.
Keep it simple.
mahalo,
j

Yeah i definitely want to keep it simple and I think i have some flexibility in my unique situation. So if both scenarios work (1. collect and report income, and 2. consider the house still mine and friend is just paying expenses)... which is simpler and what are the pros and cons of both tax wise?

You pay taxes if you file rental income or money received as income.
You don't file income taxes on a friend who is staying at your house keeping you company and helping with the bills and expenses and food, etc.
The home expenses, mortgage, etc, are still deductible.
j

The rules on renting your house are complex, but you should already know all of this from filling out Schedule E for your existing rental. The main advantage is being able to depreciate the house over time and that’s where the tax savings is. Your problem will be that in order to do that you cannot be there using it more than 14 days a year. What I would do is let your friend stay there, have them reimburse you for the utilities and taxes and visit as often as you like, just don’t collect any rent. Maybe he/she could take you out to dinner when you visit.

My friend will be paying me $3k a month (if put on the open market i could probably get close to $5k/month for the 3BR Fully Furnished), Would that be a small enough amount to claim as "utilities and taxes" instead of "rent"?

I'm still trying to wrap my head around the depreciation of the whole house as a rental vs being able to write off your mortgage interest. I too am not an accountant, so i still don't really know what the pros/cons of either situation are and which one is simpler for my situation.

If you are claiming the in-law portion rental on Schedule E, you should be familiar with the tax benefits and consequences of doing so. You get to depreciate 1/3 of the house on a certain schedule, claim 1/3 of the mortgage, 1/3 of the taxes against the income, and any repairs and maintenance costs. In early years of ownership there is usually a large benefit to claiming the rental. We have rented out a small portion of our property for 32 years. After the first 19 years when the property was fully depreciated, the income ended up being more than the expenses and we had to pay taxes on it. Prior to that, it was a deduction.

As far as $3000 a month counting as utilities and taxes, that depends on your expenses, but that seems like an awful lot. You would have to make that calculation.

I'm in the keep it simple group. Friend stays at your house as a house sitter and makes a monthly donation to the mortgage. No rental agreement etc. In fact, some would say why not pay him for house sitting.

In regard to the depreciation, do realize that if you later sell the house for a gain over the depreciated basis, the depreciation has to be recaptured. I believe this recapture is taxed at ordinary rates, not the capital gain rates so you are trading a deduction now for higher income at some point in the future.